Honest Thoughts on CAC & LTV
Fundamentals Don’t Change
As special as we think we are as an industry, we’re not. The principles of capitalism and business are just as present here, if not much more. This is something I’ve felt has been such a deeply ingrained mindset in the wider crypto consciouses. While I don’t think it’s bad or wrong, I do believe that more often than not we end up learning painful lessons that have already been learned for the past 1000-2000 years. The only difference is that the form and expression change.
Okay so where am I going with this well? There’s one principle that every business should be able to answer at its core:
How much revenue does one customer bring and how much should I be paying to acquire this user?
That’s it. It literally doesn’t matter if you call yourself a “community-owned dao” or an “agile centralised team”, you need users to survive otherwise you’ve got something no one cares about.
For virtually every protocol today, no one can answer that question or even attempt to. Why? Because it’s hard. But also because we have sub-optimal tools and thinking to answer this fundamental question.
Let’s look at the most common forms of acquiring users today: airdrops.
Most of the time protocols will say: we have a bunch of free internet money, we should give it away to all our users as a thank you for using our protocol (but also to be avoid being lynched by the mob for not making them life-changing money). There are some clear problems with this mode of thinking:
Not all users are equal. Majority are value extractive and will dump your tokens for the next bright thing that comes on their radar. A few might give you a shot. Very few will hold the free equity they’ve given you.
Even once you’ve made all these users rich, are they going to continue to use your product? Lol no. They’re going to take their money and move to the next farmable/extractive game they can play in. Metrics go down, token go down.
Does anyone know how much they would have paid in network equity over the long run? Setting X% of your supply for an airdrop that could be worth billions with no budget for future growth is a terrible way to set your protocol up for success. Incentivising future and sustained growth/contribution is much more important than creating the biggest splash you can out of the gate. Why? Because when markets go down all your hype will dissolve.
Okay okay, so where does this lead us? Well first you probably want to understand what does a good user even look like! They might understand the objective of the protocol but understanding which users drive these objectives is a massive source of confusion. A lot of the work we’re doing right now at ARCx has been helping protocols answer these questions but it fundamentally highlights the lack of education in this area of the market.
Once you understand what your best user looks like, you can then start to quantify how much their involvement in your protocol is worth through a variety of metrics. This could be quantitative or qualitative through various sources and data points in your ecosystem. Maybe they are super active in governance, maybe they’re long term HODLers, maybe they generate a ton of volume in your protocol. Whatever it is, at least you have data on what good is and how much it is worth to you.
Last but not least, once you understand what they’re worth to you. You can then understand how much you should be spending to:
Retain your best users
Acquire more best users to drive growth and profitability
This isn’t rocket science, just good old fundamentals of business. The protocols that will adopt this line of thinking and implement it will greatly outperform those that don’t.
If you’re a protocol, founder or investor curious on more thinking. Reach out. We’re doing some novel cutting-edge things.